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ISA Tax Benefits – grab them or lose them

What are the various ISA tax benefits?

Currently the Stocks and Shares ISA annual allowance is £10,200 per year, per person aged 18 or older. It is important that you are aware of the various ISA tax benefits, and, when possible invest at the start of each tax year not the end of the year.

Once the tax year is out, if you haven’t used up your ISA allowance, you have missed your opportunity to further build your tax-free retirement porfolio.

What are the ISA tax benefits:

When you become aware of the huge tax-free advantages that come with a stock and shares ISA, your first £10,200 (£20,200 in total if you have a partner) that you are planning to invest should always go into an ISA.

1.√ higher rate taxpayers save £2,800 for every £10,000 Capital Gains Tax is 28 percent after annual exemption of £10,100 (2009/10). CGT is only paid when a stock or share is sold (or gifted). Neither taper relief nor indexation exists for private investors since April 2008.

You cannot "bed and breakfast" anymore (sell a holding then buy it back the following day to rebase the base cost with the aim to save CGT going forward). However you can "Bed and ISA".

2.√Basic rate income taxpayers save as much as £2,000 for every £10,000 income Basic rate taxpayers save 20 percent income tax on interest from cash or fixed interest ISA. No saving though on stock and shares dividend held in an ISA, effective 10p tax paid on dividends before distribution.

3.√ Higher rate income taxpayers save as much as £4,000 for every £10,000 income Higher rate taxpayers save 40 percent income tax on interest from cash and fixed interest funds.

Higher rate taxpayers also save 22.5 percent income tax on dividend income from stocks and share held in an ISA. For example, £100 gross dividend, £90 net dividend paid, if held direct, higher rate taxpayer would pay an additional £22.50 tax but in an ISA this is not paid.

4.√50 per cent income taxpayers save as much as £5,000 for every £10,000 income (2010/11) From April 2010, those tax payers whose income fall into the new 50 percent band, save 50 percent income tax on interest from cash and fixed interest funds.

These taxpayers save 32.5 percent income tax on dividend income from stocks and shares held in an ISA. For example, £100 gross dividend, £90 net dividend paid, if held direct, the 50 per cent taxpayer would pay an additional £32.50 tax. If held in an ISA this is not paid

5.√For those aged over 65, with income of £22,900 or more, save as much as £603 in income taxISA income is not only totally free from further income tax when drawn but also does not count towards the age related allowance "means" test.

6.√For those earning £100,000 and over, save as much £2,590 on loss of personal allowance (2010/11) This is similar to the age related allowances for the over 65s. ISA income is not only free from further income tax but also does not count towards the new personal allowance "means" test.